Thursday, January 25 2018
The short answer is YES.
It is possible to have a negatively geared property that completely pays for itself.
I know that doesn’t sound right but I’ll explain. Let’s start with some definitions...
A property is considered to be negatively geared when all the expenses (loan interest, rates, insurance etc) associated with the property exceed the income (Rent) generated by the property. In this instance the property would record a loss on the owner’s tax return.
A property is considered to be positively geared when the income generated by the property is greater than the expenses incurred by the property. In this instance the property would record a profit on the owner’s tax return.
Now I know you are probably reading the above and saying “Hang on Greg you just said a negatively geared property can pay for itself but how can it do that if it is making a loss?”.
The reason it is possible is that there is a difference between cashflow and profit and loss.
In some cases, the actual cash a property generates can be greater than the income that is recorded on a tax return.
But isn’t that just the same as a positively geared property?
No. In the case of a positively geared property a profit is declared and that profit is taxable. In the case of a Cash Positive Property the property records a loss so no additional tax is paid but the property still pays for itself.
So essentially you are earning extra money but not paying tax on it.
But is that legal?
Yes 100%. All income earned is fully declared and no expenses are over-stated.
So what's the benefit?
The immediate benefit is having a property that pays for itself, meaning no impact on your household budget but at the same time reducing the amount of tax you have to pay.
So clearly where possible we try to find Cash Positive Properties for our clients or at a minimum something that is at or close to cash neutral.
Like to find out more about Cash Positive Properties?